The Gart-Man Is Right

This marks the second large gap in posts I've had, so my apologies for that. This one is due in large part to the trading vacation I am (and will be) taking for a month. I am announcing a walk-away after the severe pain I just suffered in this last down turn. I referenced Dennis Gartman in the subject because on CNBC's Fast Money the other day, he made the statement that he is out of the market all together until things calm down. Now that the dollar will start to rally slowly and the bubble has burst on us, there is no telling exactly what will happen and when. Therefore, I need to take a break from trading and not return until I have the proper mindset. Nothing is more dangerous that trading out of spite against the market or against yourself. Neither one is very forgiving, and actually, the market could care less WHO you are. Happy trading to all and best wishes to you. I will likely continue to post now and again to keep myself up to date, so check back every now and again on me. I'll be back though, you can count on it!

Holy Rice Shortage!

Thought is was only third world countries with rice problems? Well, in some cities, San Francisco and the Bay Area in this article, they are not exactly rationing but they are asking their customers to not hoard any rice and to only consume based upon their normal habits. Interesting. Where do you think the price of rice is heading?

Record High Natural Gas Short Positions

According to the April Committment of Traders report, June Natural Gas contracts have a record number of short positions open, greater than 182,000 (non-commercial) open short positions to be exact (closer to 182,000). Just for comparison there are roughly 130,000 open long positions in crude oil in this same report. Energy across the board is on its way up, and if these traders get caught in a short squeeze, that could be quite a rally to the upside. Food for thought. I wish I had a link for you here, but for some reason I'm having trouble uploading the table or the link to this information, I'll have to try again later.

An Interesting Perspective On Biofuels

I was reading through the Hard Assets Investor again today (as I do every day as you may have noticed) and came across this interesting look at biofuel prices and the correlation to rising commodity prices.

Hard Assets Article

Anyways, I just thought that this was interesting given that so many people just assume that the run up in commodity prices is based upon using food to create fuel. I hate to disappoint them, but it looks like food prices will continue to rise this year.

No Room For Error With Corn This Year

I just got done browsing through another one of my favorite regional publications, the Delta Farm Press, and there was a piece in there from yesterday reiterating the seriousness of the corn shortage. There is basically no room for error according to the report. So if you think that perfect weather and bumper crops are on the horizon, then get short corn. Otherwise start coping with the thought of December corn testing levels at and above $7.

More on Rice

This article in the Financial Times is very brief but says all that it needs to: rice traders are panicking. And why wouldn't we? I sold all of my contracts this morning because any buying up on a frenzy is likely to end in the same fashion. Even if all of this increase in cost is rooted in fundamental analysis and there really isn't enough to go around and this increases the price of rice, there's just something about the manner in which this is happening that smells of nasty correction. I'm not alone. While watching Fast Money on CNBC earlier this week, Dennis Gartman stated that he doesn't want any part of it either. He's focusing in on energy right now, and I for one tend to agree with him, not that it takes a lot of guts to agree with a bright guy like that, but for what it's worth, rice will likely tumble back to earth and land with a thud.

World Unrest Over Food Prices

When I read this article posted on CNN.com, all I can think about is not an end to rising food prices, but more problems ahead.  When governments step in and try to institute price controls, this will only drastically limit supply, so the only other option is for governments to pay the open market price and subsidize the remainder of the price to its citizens.  Bear in mind, if you are feeling emotional or feel there may be moral implications to making money off of this, then be comforted by the fact that most nations produce enough rice for their populations, it is the remainder that needs to be filled or the amount that gets fed to animals to create more food that is bid up in open markets globally.  This is increasing the price of subsistence for many people struggling to make it into the middle class and eat more than just a bowl of rice.  However it is also not just the open markets setting these prices, so again, take heart.  If there was truly enough supply then this would not be much of an issue.  The major culprits here are not free markets and profiteers, they are global growth in the face of global shortages in food supply.  Simply put, profits are made in inefficient markets, not ones with well defined supply and demand.  Currently we have a dearth of supply and enough demand to incite riots.  

I'd get long soft commodities here.  And on the way up for some time.

Grim Outlook From Jim Rogers

This is an interesting interview conducted by Hard Assets Investor with Jim Rogers.  Jim is known for being very outspoken and quite a powerfully worded individual, but just wait until you read this little gem.  He really socks it to Bernanke, Greenspan, and the entire Federal Reserve Banking system as a whole!  Essentially it is his contention that if left on this path, the United States will end up as bad as Germany after World War I where just over a billion Marks would have bought you a postage stamp.  Perhaps he's right, but as an American citizen, I sure as heck hope something, anything, happens to prevent this from happening.  It's a short read, but entertaining.  

Signs Of A Bottom In The Equities Market

Why is it important to us commodity futures types what is going on in the equities world? I mean, after all, these past several months have seen some fairly impressive gains in virtually every commodity sector while the equities markets have all faltered and sold off into almost any and all perceived or actual strength. Okay, so perhaps I'm being a little too over-generalized here and most of us do recognize that equities markets are interrelated, however it is much more intertwined this time than in the past. The key link in the chain this time is credit. No matter what the investment vehicle is (equities, bonds, futures, forex, commodities, etc.) the major firms and hedge funds need access to capital in the form of credit in order to leverage their investments. Now you're starting to see it. With major sweeping changes in credit requirements, firms are having to sell assets to raise capital in order to de-leverage themselves out of some of their positions. This has all been talked about before, so we'll move toward discussing the end in sight here.

This article in New York Magazine written by Jim Cramer talks about the establishment of a bottom in the financial markets taking shape. At the bottom, some normalcy is restored and we can start mending fences. Perhaps this will mean a more responsible and less leveraged move will be made into commodities heading forward, maybe not. But either way, with new regulations in place, hopefully we won't have to see another historic selloff in this commodities market in order to free up capital for the hedge funds out there. Then again, here's hoping and nothing is for sure... that's for sure.

Commodities In The News

You know it's a big story when commodity prices start hitting everyone's radar. However in this case, it is not likely to mean a huge selloff, these are merely more reasons why commodity prices are likely to continue much, much higher. You can check out these articles, or you can see that simultaneously they both appeared on the main page of the famous Drudge Report.

Here are the links to the articles referencing the skyrocketing prices of corn and rice.

Corn

Rice

Current Thoughts

After the planting report and some time to cool my brain on vacation, I have come back with a few general thoughts about the directions of some of the commodities coming up here in the days, weeks, and months to follow. Here's where I'm at right now, please feel free to add or comment on anything you see and help steer me out of a bad decision if you can help:

CORN: Well I guess it all depends on how you interpret the concept of planting reductions in 2008. It would appear as if most of the midwest has slightly favored soybeans over corn this year. Being a midwesterner I'm not truly amazed by this for one principal reason: rotation. The past few years have been boons for ethanol plants buying up corn crops for record high prices and several farmers have even sacrificed a normal crop rotation for the possibility of windfall profits from growing corn multiple years in a row. Now, even with high prices being possible, the threat of depleting the soil for future generations of crops is simply too costly a thought and it's time to get something else in the ground. I would look for corn prices to end up higher at the end of the year even with a hearty harvest.

COTTON: Cotton prices soared, soared, the past few weeks and then plummeted back to earth just as fast the past few days. My take on this is as follows: supply will be short and the price is due for a climb out of it's current levels. However, it soard too high too fast just before a whole new wave of credit and margin concerns hit the broader markets. Then, hedge funds and institutional owernership had to pull out of the most profitable positions to pay down some margin calls. Cotton got killed because it was where most of the money was. Volume is back down as is the price and I think this is a great place to be positioned in the coming weeks to months.

RICE: I am a very big fan of rice and it has made me some great money, but the same principal concerns me here that we have seen elsewhere. Lots of other people have made money in rice too recently and I'm afraid that if the time comes, this may be the next target of profit taking and we could see prices plunge downward. Not sure it will happen, but then again, most people didn't think it would happen to any of the other softs either.

This is just a few random snapshots from my brain at this moment and where I think we're looking coming up soon. I am staying away from soybeans and coffee at the moment because even in a volatile market the swings here can give you a nosebleed. I'm also still interested in lumber once the fundamentals return. Housing is pretty much starting to carve out a bottom in the overall marketplace and therefore demand will go no lower so we may very well be observing a low in the price of lumber. Keep an eye on it, I know I will be.

Vacation Time

I apologize for the lack of notice on the vacation, but I'm back now and ready to roll.  But I did want to mention the importance of being able to step back and watch the markets for a while.  My plan was to be in an all cash position while on vacation and I timed that accordingly with the 2008 planting report.  When that report comes out, it can be a volatile day of trading, which it turned out to be.  Soybeans went limit down, corn was wild, cotton skidded much lower, and rice started limit up but settled lower at the end of the day.  Crazy day, but a good day to be in all cash.  The overall moral of the story I'm getting at here is that there is some money to be made in high volatility, but more to be lost.  There is no shame in being out of the market and often times it is good for your nerves.  Every now and again, I find it good to spectate.  Give it a shot.

Battle For Acreage

So what are you planting this year?  It's the million dollar (and often times much more) question that all farmers are asking themselves right now as planting season looms.  The Delta Farm Press has a great article from the middle of last week that talks to several southern farmers about their intentions.  I know it's an incredibly small sample size, but hey, it's at the very least the thought process of several farmers and why they are going to be doing what they are this year.  It is amazing what people do not understand about this entire process and the incredible amount of pressure there is to make the right judgement this far in advance.  Anyways, here is the link to the article I was talking about.  

With prices going up as high as they are, it will be interesting to see what happens to the market when the USDA planting report comes out shortly.  If there is so much as a hint of underplanting in any one commodity, then you will see a great rise in price on the spot.  Then again, it's not like I'm saying anything crazy here that hasn't been happening since every report ever written, but in the volatile market we have now, it will likely be accentuated.  Hold on and make sure your stops are set appropriately.  

Volatility Perspective from Brad Zigler

HardAssetsInvestor.com's Brad Zigler has an awesome piece this week about the word "volatility" and how it is often misconstrued in the capital markets today. Many people avoid commodities because they feel that they are "way too volatile." This entry into his daily column puts a little bit of science behind unraveling that myth, even in the light of the recent downturn in the commodity market at large. Great piece, I recommend you read it if you are questioning yourself as a trader in virtually any market. It truly puts a good perspective on risk and the relativity of it all.

Brad Zigler's 'Tale of Two Volatilities'

More Pain

Right now I must admit that I am feeling extemely conflicted about the current market.  Part of me wants to pull the eject lever and run for the hills.  The other part wants to stay in out of morbid curiosity and just see what happens next.  Right now there are a lot of investment banks that are changing their leverage and margin requirements, like the company I trade with for example has nearly tripled the requirements of some of the more volatile commodities of late, even the ones with daily trading limits, simply because they've been hitting these limits almost daily for the past week, up and down!  

Then you look across the street and you see fantastic fundamentals lining up.  You see dramatically increased consumption not only in the emerging markets and developing countries, but you also see a new paradigm of using the food that we grow as a source of energy.  All of this demand is mounting and prices are reacting by dropping by record amounts...  It just doesn't add up.  Somewhere, sometime, a more appropriate move to the upside will begin again, and I am sure that I want to be a part of that, it's just this suicide ride right now that I'm unsure of.  I'll keep you posted about how long I hang in and what I'm up to.  

Limit Down Daze

Well, it's been quite a volatile ride recently with a couple of limit down days in a row for several of the softs and there has been some rampant selling for the sake of creating liquidity in the face of broader market troubles.  When one of the oldest and most established investment banks in America goes from $150 a share to being bought for $2 a share less than a year later, something is seriously wrong.  On CNBC's Fast Money tonight, it was put very interestingly.  Bear Stearns survived the Great Depression, a World War, and several market crashes in between, but it should speak volumes about the gravity of the credit crisis that it was the one force able to bring them down.  It is this pressure on credit and lending that has crossed over to influence the highly leveraged commodities market.  

I suppose that beneath it all the good news is that as of right now the fundamentals are still intact for a great year of price appreciation, but it may be a rough ride to get there.  Speculators will continue to move in and out of the market as their credit/liquidity balance allows them, driving prices up and down wildly along the way, but if you keep an eye on it, they should track higher throughout the journey.  

Trade carefully, use stops along the way, and don't be afraid to take profits as well.  Happy trading-

Trading Carbon Credits

There is a really interesting piece written for HardAssets Investor today about the newest commodity to hit the market next week on Monday (March 17th). Carbon credits. Apparently these have been traded globally for some time, but the US until now has been hesitant. I'm not jumping in before I know more about the situation, but it sure seems like a new and interesting play on the new Green Revolution sweeping through the planet.

Read all about the new carbon trading here.

Cotton Party - And You're Invited!

In an article written on March 6th in the Delta Farm Press, an outstanding regional publication for Delta farmers, by Elton Robinson, CEO of Allenberg Cotton Co. Joe Nicosia was addressing cotton producers attending the Mid-South Farm and Gin Show in Memphis. Here are the key points he illustrates with a few direct quotes:

1) Cotton outlook is great for 2009-10

2) "Hang on long enough and prices are going to compete with those of corn and soybeans, Nicosia said. 'In 2009, we start to tighten the balance sheet. We have lower acreage this year, which will decrease our crop size. If we have crop problems somewhere else, it could get interesting. Cotton is going to have to rise to a certain level to compete with the other crops.'" - Sounds pretty promising

3) “To me, if you want to be long cotton, don’t be long in the spot month. Roll it out to the deferred levels and that’s where you’re going to take your real values." - Wow... I mean, I really don't have to interpret this one now do I.

What's the Fed's Next Move?

I know I just got done writing about how I felt that the employment numbers last Friday meant that the Fed was being handed their instructions on when to cut and by how much. Then Bernanke and company decided to pull this little liquidity move today and offer up $200 billion to investment banks. Then the equities markets reacted quite nicely with a jump of over 400 points on the Dow. Pretty impressive. The only problem now is that it re-opens the question of the next Fed meeting. Do they still cut by 75 basis points? 50 basis points? Do they trim it down to 25 basis points after the positive reaction from today? Or is the impossible going to become possible and they don't cut at all and start standing firm and defending the dollar?

Frankly I don't believe the last case to be true, but more and more I find myself being torn about the first two options. I can see the argument that can be made for the 75 point cut because in combination with today's actions, perhaps it is a potent one-two punch that can really be a shot in the arm for the markets at large. However I think the 50 point cut is the most logical and likely after today.

What does this mean? Well, the most basic interpretation is that there is still going to be a cut and that will still continue to devalue the dollar. This will in turn create another surge in currency futures, perhaps not too large since it has been built into the price for a while, but a nice little punch all the same. Commodities in general should do well based on this continued falling dollar.

Overall, the actions of this week are not going to make or break any market, but I am looking for continued strength in the commodities markets going forward.

Agriculture Boom

At the fundamental level of commodities (or equities, bonds, or derivatives etc.) what exactly is it that drives price higher? Demand. Simply put. You can say fundamentals, but demand is the most fundamental concept there is. So why do I mention this now? This article from HardAssets Investor written late last week points out that in just over a year an Index fund had to close to new money because it reached its maximum capacity so rapidly. While there are still relatively very few funds out there invested solely in commodities, and the individual investors like ourselves are in relatively short supply (compare daily volume of corn or even oil to QQQQ sometime just for kicks...), there are more people piling in to this space every day.

Unlike equities where there are IPO's and new corporations formed and new issues of stock released, there simply is a finite amount of space for the commodity investor to roam around in, therefore, whenever it gets crowded, you'll find people paying higher prices just to "get in to the market." For those of you who have watched CNBC for at least a year or more now, sit back and take note of how many times in a day, or hour for that matter, they mention rising commodity prices. This boom is exciting the average investor that wants into the space and index funds want to provide an outlet for them.

The moral of the story is hold on for a great bull market for a while. The internet and news media are the two reasons why I believe that this bull market will be the largest in history. Now have I been trading commodities for 30 years and have a PhD or some grounds to make this statement? No, not really. But what I do know is that the internet is the perfect vehicle to drive information to the masses. Remember the tech bubble of the 90's? One of the largest busts in history since 1929 largely because everyone was in the market! People I didn't know were giving me stock tips, heck, the NASDAQ still hasn't hit those levels again and likely won't for some time. Finally, what I'm saying is that just as soon as everyone wants in, you should be the first to get out!

What Will Pull Us Out of the Downturn?

First of all I must say that I agree with the statement that this is a downturn or a correction, not a new direction for the market.  Now, with that out of the way, the answer to the topic question is this:  institutional buying coupled with speculator reaction.  Speculators helped drive this market as high as it is now, and they are also the ones that are pushing it lower now trying to lock in some profit (whatever is left at this point).  Now, in the face of a rising bull market for the foreseeable future, this is where institutional buyers start coming in and trying to bottom pick what may be some of the best prices for the rest of 2008.  Once this demand is noticed and the speculators start sniffing it out, then back on the march upward we go.  I'm not saying it's a quick process, but it may be.  All together though, commodities are still the place to be this year.

And the good news is...

If you can take the pain, stay in it.  I quite honestly question it myself VERY frequently, but with the jobs number that came out this morning, it truly puts the Fed in a corner and as opposed to taking the hard line and not cutting rates (which according to some was fairly likely) they no longer have much of a choice based upon the current employment situation.  They will likely cut as the equities markets have priced in and this will continue to devalue the dollar making the price of American commodities cheaper to foreign buyers.  From here it doesn't take much of a leap to realize that increased buying (demand) in the face of continued limited supply will steadily cause a price increase.  It is often nice to have some solid fundamentals behind the upswing in price we've been experiencing, aside from the current correction of course. 

Education for Beginners

Some people have asked me where do you even start trying to learn about commodities and trading futures? You can't exactly just turn on CNBC and catch up on the latest trends in soybeans or open up your local paper and find out that the African cocoa crop has been wiped out (and for the record it has not been so don't go trampling anyone just yet). But then again, I suppose we should start out by trying to figure out why either of those issues even matter! For this I will refer you to a few good places to go for education.

The very first one that I would recommend is the book Hot Commodities: How Anyone Can Invest Profitably In The World's Best Market written by Jim Rogers. I know I have already cited him once in the short lifespan of this blog, but he is truly a good person to learn from. The link there is to the Amazon webpage that has a description of the book and how you can buy it. I was lucky, my local library had it and I just checked it out there. Here Jim takes you through the very basics of fundamental commodities investing, demystifies horror stories you hear about "guys that lost everything" in the commodities markets, and then takes you on up through some basic plays and strategies to keep an eye on for the coming years.

If you are more web prone, you can get some good starter information from the Hard Assets Investor website Hard Assets University. This is a completely free program that goes through "classes" like 101, 201, 301 etc. It starts with a very basic entry and moves on up through advanced concepts for active traders. I like this site because it borrows from the knowledge of a large group of authors and is not biased by one individual.

Overall, I would encourage anyone to look beyond these two sources and NEVER utilize only one person's methodology. You truly need to go out there, educate yourself, and develop a trading plan that works for you. If anyone has any other great ideas, leave some comments and we can discuss anything anyone has come across.

A Note on Corrections

Yesterday was a fairly rough day for many of the softs, some even hit limit down. Does this mean it's all over? Absolutely not. This is simply a temporary "correction" in the value of these commodities. There has been no major global surplus harvested in all of these crops in the past 12 hours (a Santa Claus like feat), and short of nuclear war there will be no blights unleashed that will wipe out all global production sending prices skyward either (if there is, I'm afraid we all have something a little more important to worry about than the price of corn my friends). The bottom line is that the fundamentals are still in place, however the short term speculators (like all of us) have driven prices slightly higher than the current market will bear for a few days/weeks. The following information will help paint a more scientific picture for you than just my opinions as to why this is a confirmed bull market that will not end abruptly:

1) Read this interview with Jim Rogers done by the online publication HardAssets Investor (HAI). First, if you don't know who Jim Rogers is, he is one of the premier minds in all of commodities investing and takes a more Warren Buffett long term approach to investing. Second, this article highlights many of his points about the status of our current bull market.

2) Big Red. That's right, that's my name for China. Nothing has changed here last night. Even if their blistering GDP growth slows from 11% to 8%, which by the way would be significant especially with the Olympic Games being held there in a few months, you still have 1.3 billion people that are joining the middle class a the most rapid pace in human history. People in the middle class consume more high quality food products (made from corn, sugar, etc.), wear nicer cotton clothing, and consume more energy (oil, nat gas, and even biofuels). So if you're convinced that Big Red is a fraud, then by all means, sell everything and get out of commodities right now without reading on.

3) Energy. Many people are commodity historians and they look back to past booms to compare this one too and say that, "It can never hold up!" Well, their analysis is based upon domestic population growth and historical consumption data. If you've been under a rock for the last 5 years, first of all welcome to the sunny side, second of all, we're using more and more products from the earth and converting them into energy daily. DAILY. This demand is soaring and has only begun. I truly believe that demand for many of these crops is experiencing the iceberg effect, we have only seen the first 10% of it. Now that's not to say the speculators haven't priced in more than 10%, but I don't think anyone can fathom 100% yet, simply because oil is still just too relatively cheap (don't jump me, I said RELATIVELY) compared to its alternatives.

I'll stop there for now, hoping that I have given you some heart to stay with this market even if it is handing you some lumps.

Current Thoughts on Rough Rice

I read two powerful sources today in regards to the upcoming supply issues with rough rice overseas. The first was in the CME Group daily newsletter (free by the way, just go to their website and sign up!) The artice cited the nation of Vietnam, a major global producer of rice, was having difficulties meeting demands and that prices spiked 3.2% in the past week. They are also not providing any quotes to foreign buyers because they simply cannot meet domestic demand.

Another nation having issues... China. That's right I said it. Big Red. According to rice trading phenom Milo Hamilton, China is also not providing foreign buyers any prices due to their inability to export at this time. Sounds like two nations are bound to become net importers this season. Right now I'd let rough rice contracts settle down, but get in and ride up with the rest of the bull market.

Getting Things Started

Hello and welcome to the Commodity Roundup Blog. The purpose of this blog will be to inform and entertain all commodity investors and traders on a daily basis as I pick my way through the life of a part-time commodity investor. Along the way, I will post my positions and entry and exit points as a reference for all of those who are interested in keeping score (no promises for it to be pretty, just educational). If nothing else, I hope to educate and help out along the way, so please post anything at any time and let's get conversations started!